Cover Story: The black gold conundrum

This article first appeared in The Edge Malaysia Weekly, on July 30, 2018 - August 05, 2018.
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CONFUSING — that is the best way to describe the petroleum royalty conundrum the country is currently facing. And the more statements the federal and state governments make on the issue, the more confusing it becomes.

It all started with Pakatan Harapan (PH) promising in its election manifesto to raise oil royalties. After PH scored an upset victory in the 14th general election, Sarawak demanded that the coalition keep its promise. At the same time, the state sought more authority to manage its hydrocarbon resources — a matter that has been brought to court by Petroliam Nasional Bhd (Petronas).

Two weeks ago, Prime Minister Tun Dr Mahathir Mohamad said the federal government would fulfil the 20% royalty pledge but with a caveat — the calculation would be based on Petronas’ profit rather than the number of barrels produced a year.

Oil-producing states are apparently opposed to this proposal. Shouldn’t royalty be paid on the consumption of the reserves and not the profits derived from them? If it is based on profit, should the states also bear part of the production costs, particularly when they are creeping up despite the drop in crude oil prices?

It all boils down to how much the producing states will get at the end of the day. Will 20% royalty based on profit be higher than what they will get from the current 5% royalty based on production levels?

The Auditor-General’s Report 2016 reveals that Sabah received RM787.83 million, Sarawak RM1.49 billion and Terengganu RM1.05 billion as petroleum royalty for that year.

The oil-producing states — especially Sabah and Sarawak — seem to want a devolution of power from Putrajaya to Kuching and Kota Kinabalu.

Asking for a higher royalty is seen as the first step towards the decentralisation of power and finances. Greater autonomy has been the rallying cry of ethno-nationalists in the two states for a number of years now.

“It is a start for us. Let us try it out with 20% first, and we will manage our own education and healthcare services. So, the federal government can save on that expenditure,” says Dr Oh Ei Sun, Senior Fellow at S Rajaratnam School of International Studies, Nanyang Technological University, Singapore.

“It’s like killing two birds with one stone — we get more of our rights back and more of royalty too,” says Oh, a Sabahan.

But should striving for greater autonomy for Sabah and Sarawak be pursued at all costs? At the same time, the PH government must adhere to the pledges it made in its manifesto.

At press time, there was no response to questions sent by The Edge to the parties involved, including Wan Saiful Wan Jan of Parti Pribumi Bersatu Malaysia, who played an important role in drafting PH’s election manifesto.

Rafizi Ramli, who is Parti Keadilan Rakyat vice-president and founder of volunteer organisation INVOKE, declined to comment.

Ong Kian Ming, special officer to the minister of finance and Bangi MP, would only say that the manifesto was designed after consulting various stakeholders.

Economic Affairs Minister Datuk Seri Azmin Ali said in a July 25 statement that the plan to increase oil royalty to 20% from the current 10% (5% to the federal government and another 5% to the state government) cannot be implemented immediately. This did not help clear the air.

While the pledge to increase the share of revenue derived from oil and gas resources between the federal and state governments remains intact, many question the former’s resolve to allow more financial resources to be transferred to the hands of the states.

After all, the federal government needs oil revenue urgently in view of the massive national debt of RM1 trillion that it uncovered after GE14.

Reducing the national debt while keeping economic growth and the value of the ringgit stable is a daunting task.

Revenue from oil resources, including dividends from Petronas and the Petroleum Income Tax, accounts for 15% of public revenue. Of the revised estimate of total revenue of RM225.34 billion in 2017, revenue from petroleum resources accounted for RM33.8 billion. This is equivalent to the federal government’s supply and services expenditure in 2017. One could argue that if a bigger share of petroleum revenue has to be shared with oil-producing states, Putrajaya would have to tighten its belt even more.

Some pundits argue that increasing oil royalty to the states is a good gesture of distributive justice. However, such generosity could deal a blow to the nation’s coffers.

“This is a political negotiation process between the federal government and the oil-producing states. It seems the prime minister’s strategy is for the states to be content with the 5% royalty,” says associate professor Dr Awang Azman, a sociopolitical analyst at the Department of Socio-culture, Academy of Malay Studies, Universiti Malaya.

“We have to understand the current situation in the country, where the current government is left with a mountain of debt. A 20% royalty to the states will cause a huge revenue loss to Petronas,” he tells The Edge.

He says PH might see petroleum royalty as a localised issue that concerns just three states and that there are other issues the federal government can tackle that would benefit a wider base.

These include the zerorisation of the Goods and Services Tax (GST) and the freezing of fuel prices, which benefit people across the country.

As for the Sarawak government, which has been the most vocal among the three major oil-producing states in demanding higher royalty, it is now an opposition state, which means it may have to accept the 5% royalty regime for the time being.

However, economics professor Dr Bala Ramasamy, who is associate dean at the China-Europe International Business School (CEIBS), says Petronas would be hit by allowing oil-producing states to get 20% royalty based on production levels.

“To me, the federal government should increase the royalty level to 20% of production, so that the extra cost is reflected in Petronas’ income statement and balance sheets. This will make Petronas more efficient,” he says.

It is likely that calculating oil royalty based on net profit could mean lower revenue for the states compared with the current regime, he adds. It would also be harder for the states to balance their income and expenditure if the new proposal is adopted.

In a brief reply to The Edge, Petronas says, “As royalty payment is a federal-state matter, Petronas stands guided by the government of Malaysia, being the shareholder of Petronas.”


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